The domestic equity market has shown a strong recovery over the past month, with benchmark indices Sensex and Nifty rebounding 4.83% and 5.48%, respectively, after a prolonged sell-off that lasted for over five months. The past month’s recovery in the equity markets across market-cap categories is also reflected in the mutual fund space. All key mutual fund categories, particularly small-cap and mid-cap, have seen a significant revival in the last month. The small-cap mutual fund category has topped the chart with an average one-month return of 7.49%, followed by the mid-cap category’s average yield of 6.55%.
When the market started sliding in October 2024 through early March 2025, small-cap stocks were the most affected, with the BSE 250 SmallCap Index plunging over 24% from its peak. This decline was reflected in small-cap mutual funds as well. However, now that the market has regained some lost ground over the past month, small-cap funds are leading the recovery.
Over the past month, all 49 small-cap mutual funds have generated positive returns, ranging from 5.62% to 9.67%. However, the losses sustained over the previous five months, from October 2024 to February 2025, were so severe that the category’s three-month and six-month average returns remain in negative territory, at (-)19% and (-)22%, respectively.
As we focus on the equity market’s recovery over the past month following the prolonged five-month sell-off, we will analyze the one-month performance of the top five small-cap mutual funds. Investors must note that a one-month period is too short for any investment evaluation, and the same applies to mutual funds. Therefore, no investment decision should be based solely on the returns generated by small-cap funds in this period. Investors should also consider returns over various time frames, along with other key parameters. Moreover, past returns should never be considered an indicator of future performance.
5 best small-cap mutual funds based on their 1-month returns
1. Bank of India Small Cap Fund
1-month return: 9.67%
Riskometer level: Very High
Assets: Rs 1,390 crore
Expense Ratio: 0.54%
2. TRUSTMF Small Cap Fund
1-month return: 9.24%
Riskometer level:
Assets: Rs 717 crore
Expense ratio: 0.51%
3. ITI Small Cap Fund
1-month return: 9.14%
Riskometer level: Very High
Assets: Rs 2,011 crore
Expense ratio: 0.56%
4. LIC MF Small Cap Fund
1-month return: 9.09%
Riskometer level: Very High
Assets: 434 crore
Expense ratio: 0.97%
5. Aditya Birla Sun Life Small Cap Fund
1-month return:
Riskometer level: Very High
Assets: Rs 4,054 crore
Expense ratio: 1.04%
(Data source: Value Research)
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Remember, small-cap mutual funds can give you attractive returns, but it also carries some significant risks. The performance of these funds is quite volatile as small-cap stocks undergo major fluctuations. These funds are most affected during market downturns.
Apart from this, small-cap companies are more affected by various macroeconomic factors, such as changes in interest rates, government policies and global economic conditions. The quality of corporate governance and management in these companies may also be lower than that of large companies, which increases the risk in the long term. Since these funds can see a huge decline in the short-term, they are not suitable for investors who want to make short-term investments.
What to keep in mind while selecting small-cap mutual funds?
Besides returns, investors should also keep in mind some important aspects while investing in small-cap mutual funds. First, it is important to see the track record of the fund to see how it has performed in different market conditions. Apart from this, the expense ratio is also important, as high management fees can have a negative impact on returns.
The experience of the fund manager also matters, as an experienced fund manager can handle market volatility better. Investors should also assess the risk-adjusted return instead of looking only at high returns. Also, the size of the assets under management should be balanced — very small funds have liquidity risk, while very large funds may find it difficult to invest in small-cap stocks.
Also read: Only 3 out of 519 equity mutual funds delivered positive returns in 6 months — Do you own one?
Finally, diversification in the fund’s portfolio is also important to reduce risk. Investors should decide to invest in small-cap mutual funds, keeping in mind their financial goals, risk appetite, and investment horizon.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.